Should You Outsource a Mess?

Today’s business environment demands that corporations leave no stone unturned in their quest to improve and refine operational efficiencies and reap the subsequent rewards: increased revenue; market gain; enhanced shareholder value; and, in some cases, sheer survival of the enterprise.

As the double-edged sword of globalization – new market opportunities on one edge, increased competition on the other – relentlessly forces companies to pare away waste and inefficiency in their business processes, business process outsourcing (BPO) and information technology outsourcing (ITO) continue to demonstrate their worth. Increasingly, the question enterprises seeking a solution to costly, inefficient business processes are asking is: Should we outsource a mess, or should we stabilize it first?

Due Diligence is Key

Many companies deduce that a business function is dysfunctional (a “mess”); they just don’t know exactly what is causing the dysfunction and whether they have the wherewithal to fix it. “A lot of folks who are getting into outsourcing for the first time don’t know what they don’t know,” says Curtiss Montgomery, practice director for CTG, an IT outsourcing firm based in Buffalo, N.Y.

Montgomery believes preparation is paramount, regardless of which route the buyer takes. “You absolutely must have some understanding of what a well-run department looks like or what your objective is before you outsource. CTG is very consultative during the whole sourcing process, but we often recommend that a client get assistance from third-party consulting firms or one of the major outsourcing law firms.”

From Montgomery’s perspective, the key question is not whether you should outsource a mess; it’s whether you understand the mess you are outsourcing. He points out that if a function is a mess today and the buyer does not know what good or best practices for that function would be, the buyer is also not likely to know whether a potential supplier is providing best practices. Understanding the current state of what is being outsourced also becomes the yardstick for measuring those internal service levels and costs against industry best practices and outsourcing supplier pricing.

If you not only recognize the obvious shortcomings of a failing business process but also have a clear vision of industry best practices and the results they provide, the question of whether outsourcing a mess is advisable or not is moot. At least that is what can be inferred when Peter Dudley, former group telecommunications director for one of the world’s top 10 corporations and now running his own consulting business, weighs in on the subject. Dudley advises that strict attention be paid to the construction of the contract so that it clearly defines the functions of the in-house department and the services the supplier will subsequently render.

To get best value, he says, a company needs to clearly understand what service and costs it currently has, what is being offered by the outsource supplier in the “steady state” and the costs (both internal and external) of the transition to get there.

Buyers cannot pinpoint the value proposition of the outsourcing initiative for a business case analysis without understanding the starting point. “The less an enterprise knows about its current state of operation,” Dudley warns, “the more approximate will be the numbers that go into the business case (whether they relate to costs, service levels or anything else) and, therefore, the greater the risk will be, not just in understanding the ‘before’ and ‘after’ steady-state costs but also in understanding transition costs.”

He continues, “Attempts to mitigate the risks of transition costs by limiting the enterprise’s liability will probably result in the enterprise paying a premium. The higher the risk, the higher the premium that a supplier will charge. Similarly, the greater the ‘mess’ that is to be outsourced, the greater the risk and, hence, the higher the premium. Whether that risk is worth taking depends on the enterprise and its circumstances at the time.”

Fix it First

Another point of view is that an enterprise looking to outsource a business process that it can no longer manage should first seek help in putting it into some semblance of order before outsourcing it. So says Joe Santana, an ITO consultant and expert in IT organizational development who recommends a three-pronged approach to preparation: 1) Put the current process under a microscope; 2) Fix the mess; and 3) Outsource all of the commodities that somebody else can do cheaper and better.

“You’re going to end up with a better process, you’re going to end up outsourcing the right stuff instead of the wrong stuff, and you’re going to get a lot more return on your investment,” Santana explains.

Joe Vales, senior partner with Vales Consulting Group, LLC, has a different take on the issue of whether a dysfunctional process should be outsourced without any attempt to first clean it up. “If you had asked me this question three years ago, I might have said never outsource a mess,” he admits. “But today we’re a little wiser, and there are reasons why a buyer may need to outsource a mess.”

Get Rid of the Mess

Those reasons could be manifold: lack of time and money needed to reengineer the ERP system in-house, inability to implement the necessary change management or inability to mitigate the inevitable diversion of resources from the enterprise’s core competencies. Perhaps the buyer didn’t invest in technology or didn’t have a culture that enabled them to implement the necessary standards.

“There is a growing recognition in the market that there is a lot of benefit to outsourcing a mess – or what we now refer to as the ‘current state.’ Who says the buyer can fix the mess itself? The mess exists for a reason,” says Vales.

Vales continues, “The outsourcers in the BPO area have matured over the years. So now buyers can find an outsourcer who can handle various different ERP systems and regional issues as far as compliance and who are able to bring a global solution.”

The reality is that, unlike three to five years ago, there are now companies that can take a buyer’s current state and stabilize it for 18-24 months and then move to a transformational mode after that.

Commoditized business functions like HR, call centers and some back-office functions are more apt to withstand being outsourced in a “messy” state. As Montgomery describes it, outsourcing such commodity functions, even in a state of confusion, can be a “quick task.” There are a number of reputable outsourcers that provide such commoditized functions and can relatively easily take over a process and imbue it with the best practices necessary to achieve the efficiencies the client desires.

Mitigating the Risk

Anytime a buyer entrusts a portion of its business to another entity, there is an element of risk. Vales points out that risk management is now the number two concern of buyers considering outsourcing. Does the supplier have a stakeholder’s dedication and commitment to succeed? Do they clearly understand the services needed? Are the metrics relevant to the business objectives? Are they competent when in crisis mode?

While the contract should provide an umbrella of comfort for both buyer and supplier, the relationship can still be fraught with trepidation and, in some cases, skepticism, especially when the proposed activity to be outsourced is severely broken.

The taking-over-the-mess-and-stabilizing-then-moving-to-transformation message is resonating very well with companies who see that as a less risky approach to outsourcing. Buyers considering this strategy should look at a provider’s track record in stabilizing other clients’ work over an 18-24-month period before transforming.

Sometimes, outsourcing a mess can be the quickest and most effective remedy. Says CTG’s Montgomery, “We have certainly done deals where we would take over an IT department and hire most of the client staff but manage them differentlyÉand get greatly improved behavior and process out of people within months that the client company had been unable to achieve.” Introducing best practices and managing to change behavior brings about the improvement. Outsourcers are not necessarily better managers than in-house managers across the board, but they are agents of change.

Suppliers must also mitigate risks whenever possible. The ability of suppliers to do due diligence and understand a buyer’s current state has dramatically improved, and they are much better today at accurately bidding in these scenarios.

Santana believes suppliers and clients benefit from the problem being fixed first because they will have a better idea of the type and scope of services needed to meet buyers’ objectives. This also allows for structuring a deal that is mutually beneficial. “You don’t need to jump into the outsourcing deal in order to have somebody fix the mess for you,” he advises. “You can have them fix the mess for you as part of a transformational-consulting effort and then, with more information and in a more prudent way, select what commodity-type services can be done better by leveraging the supplier’s capabilities.”

Factors to Consider

Vales notes that the firms with deep consulting expertise advise buyers against outsourcing a mess; they transform it and build a new state as fast as possible – using the supplier’s consulting and integration skills. Suppliers whose heritage is not strong in consulting often advise buyers they will take over the mess, re-badge the employees, integrate the process and system with the supplier’s and stabilize it but not transform it for a couple of years.

Ultimately, there are no hard, fast rules on whether to outsource a mess or to stabilize it before outsourcing. What you are outsourcing plays a part in the decision. There are other factors: How does the cost of fixing the mess in house compare with outsourcing it in its unstable state? Does the buyer’s corporate culture lend itself to an internal fix? Is there enough understanding of the process (as measured against industry best practices) to know what to request and expect from a supplier?

Outsourcing a mess puts tremendous pressure on the supplier to perform; therefore, it demands that the contract be structured correctly (with adequate flexibility) so as not to place unreasonable demands on the supplier while also serving client needs.

A company considering outsourcing must not only look long and hard at what its business objectives are but also the transition time of outsourcing, the cost involved (both obvious and hidden) and the impact on its employees. Only then can it make the decision that’s right for the company.

This article first appeared in Outsourcing Venture, which holds the copyright.

Useful Links

CTG
http://www.ctg.com/index.htm

Joe Santana
http://www.joesantana.com

Vales Consulting Group, LLC
http://www.valesconsulting.com/